Front Page	E-mail PagePrint Version

IMF chief says hot exports mask deeper economic issues and deficiencies

WASHINGTON, DC – 05/23/08 – Despite recent growth, Latin America’s separate economies are faced with external threats from two sources – the impact of the current mortgage crisis on the overall US economy and China's unbalanced economic growth, which is weighted toward exports while the domestic market remains stunted.

The solution, says Dominique Strauss-Kahn, managing director of the International Monetary Fund, is for countries in the region “to improve their overall business climates and encourage new industries if they expect to continue to thrive in the global, knowledge-based economy.”

Strauss-Kahn shared his observations in Washington, DC at the recent two-day 38th annual meeting of the Council of the Americas.

“Direct foreign investment coming into Latin American countries is one-third lower than that of East Asia,” he said, echoing other experts who believe that if Latin American countries were to improve their business climates, manufacturing and service businesses would thrive and more foreign companies would want to locate facilities in Latin America.

Diversified economies are "resilient" economies, they say.

To attract foreign investors to Latin American companies’ stocks and foreign businesses to the region, some Latin American governments are educating workers, building physical and technological infrastructure and even reforming judicial systems to make them business-friendly.

Latin America participates in world trade to a much greater degree than it did a decade ago.  Today, high prices are boosting the fortunes of countries exporting soy, tin, copper, iron ore, and other commodities.  But if prices do not continue to rise, such commodity dependence could harm Latin American economies.

The region, Strauss-Kahn said, “should increase its focus on value-added products; for instance, he said, countries should develop their oil and gas sectors, which are experiencing low productivity growth compared to that of other developing regions.”

Despite strong overall growth in Latin America and the Caribbean during the past decade, poverty levels have not changed much in many countries, he said.

“The region’s dependence on exports of minerals and agricultural products is one reason. Commodity-based economies are less effective in reducing poverty than economies based on manufacturing,” he said, adding that Latin America's share of manufactured products in the global economy “is declining” and “a significant concern.”

Countries like Chile, Peru, Brazil, some in Central America, and Mexico “get it,” said Eric Farnsworth of the Council of the Americas after the conference.

“They are trying to do the right thing…while others in the region are going in the opposite direction, which is unattractive to investors.”

Many discussions at the two-day meeting focused on how the region "fits into a world that is growing smaller,” he said.

Peru's finance minister, Luis Carranza Ugarte, spoke at the meeting of the challenges Peru faces in maintaining its high growth rate – 9% in 2007 – while “pressing ahead with economic reforms intended to redistribute wealth, reduce poverty and improve the overall business climate.”

According to Carranza, “Wages that stay low during high growth exacerbate social inequality,” outlining the country’s move toward enacting a flat tax.

Peru, an avid proponent of free trade, is preparing to host the annual meeting of the Asia-Pacific Economic Cooperation (APEC) forum in Lima in November.

"Openness is important for growth in any small economy,” Carranza said. “Peru wants free trade agreements with any country. The free trade agreement with the United States is a key piece in Peru's strategy. Peru wants free trade in the entire Pacific area."

The finance minister said high food prices are causing hardship for Peru's poor and, to deal with the crisis, the government is creating a temporary feeding program for its neediest citizens while working to increase the food supply by introducing better seeds and technology. He mentioned a special program to encourage potato cultivation.

The food crisis is gripping several other countries in the hemisphere, and Strauss-Kahn advised governments not to seek quick fixes, such as tampering with the tax structure.

He said the easiest solution to deal with civil discontent stemming from food shortages would be to cut import and sales taxes, but that would create a problem later because of the eventual need to re-impose them.

A wiser course of action “would be to provide temporary food subsidies,” Strauss-Kahn said.

Go back, or read the latest Front Page stories:

Obama Should Complete Doha Round, CEOs Say

NEW YORK – 11/20/08 – A number of senior level corporate executives are urging the incoming Obama Administration to complete the long-stalled Doha Round of international trade talks in a new report published by the Wall Street Journal; responding to the report, New York Democrat Sen. Charles Schumer said that the Obama Administration and ''Democrats in general think we should trade in the global world,'' but concerns about ''income inequality'' should make business and government ''work together to cushion the blow.''